Central banks should embrace digital currencies, Axel Weber says

Ralph Atkins
Ralph Atkins
Financial Times14 November 2017

Central banks should be more open to creating digital versions of their currencies, which could offer significant benefits to society, the chairman of Swiss bank UBS says.

Axel Weber is a past president of Germany’s conservative Bundesbank — and was once tipped as a future head of the European Central Bank. As UBS chairman, he is helping to drive a revolution in how banks, companies and individuals conduct financial transactions.

In an interview with the Financial Times, he now worries his former public sector colleagues may be left behind. “Whilst the official sector very often looks at the risks of these new means of payment, the private sector tends to look at the opportunities they offer,” he says.

Mr Weber’s comments come amid uncertainty among central bankers over how they should react to the rise of digital and cryptocurrencies and how they operate beyond official financial systems — he carefully distinguishes the latter as using encryption to mask transactions.

The chairman argues the issue is not the volatility of bitcoin prices — the currency is “simply too insignificant to matter” from a financial stability perspective.

The official sector very often looks at the risks of these new means of payment

It’s more that the threat of the crypto world financing terrorism or enabling money laundering will eventually prompt a stronger response from authorities. There is “a relatively high probability that regulators will regulate it at some point”.

Less clear cut, however, are likely to be arguments over digital currencies issued by central banks. Like cash, which they could eventually replace — but unlike bitcoin — they would be backed by monetary authorities, so they would also act as a store of value as well as widely accepted means of payment.

In China, the central bank has said it will develop a digital currency using the blockchain technology behind bitcoin. In Europe, Sweden’s Riksbank published a report in September suggesting there were few obstacles to issuing e-krona.

But other central banks have been much more cautious. Jens Weidmann, Mr Weber’s successor as Bundesbank president, argued the focus should instead be on improving existing payment systems.

Like the Bundesbank, the Swiss National Bank is not convinced of the need for central bank e-currencies. There are fears that in times of panic, customers could quickly switch funds out of normal bank accounts and into e-currencies, exacerbating bank runs. Germans and Swiss also remain heavy users of cash — unlike Swedes.

Mr Weber, however, says central banks are wrong to think it is a case of either traditional cash or e-currencies. Payment patterns evolve, he says, with younger generations more likely to pay via mobiles, independently of banks. If central banks regarded digital currencies as an opportunity, they could “probably provide non-account-related payment services for society in a cheaper and more economic way”.

The advantages would be most apparent in geographically large countries, where cash transport is expensive — such as on the African continent. Mr Weber envisages digital currencies not having the anonymity of cash — indeed features in the currency could identify users, so minors could be prevented from buying alcohol, for instance. But the technology would have to be hacker-proof. “It has to be a very secure means of payment.”

Meanwhile, UBS is pressing ahead with its own digital currency. It is working with other banks, including Barclays, Credit Suisse and HSBC, on a “utility settlement coin”.

It would use the same distributed ledger technology as blockchain and could be used to clear and settle financial transactions. The idea is that “coins” used for transactions would be backed by cash held in accounts at central banks. They would be safer and quicker than current systems based around a single centre counterparty.

Mr Weber reports “an openness by central banks to hear about the concept” but admits the scheme is a long way from becoming operational.

The storage and the computing power needed for such networks to be fast as current systems ‘’are not yet there. So speed relative to traditional databases is still an issue.”

The UBS chairman says the utility settlement coin could be opened up to third-party users, which would include the bank’s biggest customers. But he envisages different coins being used for transactions in different currencies, such as the euro or dollar — so it would not become a prototype world currency.

Debate about the future of digital currencies has been overshadowed by the hype over bitcoin. Does Mr Weber worry a bitcoin crash might set back digital currency pioneers? The UBS chairman is adamant it will not. “People do. . . draw the distinction between the construction of bitcoin or cryptocurrencies as they are now, and the potential that the underlying technology has,” he says.